Performance of Non-Banking Financial Companies in India - An Evaluation

- Journal of Arts Science & Commerce
ISSN 2229-4686
123
PERFORMANCE OF NON-BANKING FINANCIAL COMPANIES

IN INDIA - AN EVALUATION
Suresh Vadde
Associate Professor
Commerce & Business Management,
P.G Centre, Lal Bahadur College,
S.P Road, Warangal- 506009 (A.P) India.
ABSTRACT
Non-banking financial and investment companies operate as an important adjunct
to the banking sector in financial intermediation. They provide support to the capital
market through investment holding, share trading and merchant banking activities, to the
credit market through short and medium-term loans and also help in acquiring long-term
assets through lease and hire purchase activities. This article analyses the performance of
non-government financial and investment companies (other than banking, insurance and
chit-fund companies) during the year 2008-09. The study is based on the audited annual
accounts of 1,215 companies, which closed their accounts during the period April 2008 to
March 2009. The segment of financial and investment companies in the private corporate
sector is highly skewed. The presence of a large sized company, viz., Housing
Development Finance Corporation (HDFC) Limited in the study would exert
considerable influence on the overall performance of the companies in this group in terms
of various quantitative measures. In view of such marked skewness in the size structure,
the analysis presented in the article excludes results of HDFC. Further, it is observed that
the results of three other companies are in large variance with the remaining companies
and accordingly these companies are also kept outside the scope of the study. Thus, the
present analysis is confined to 1,211 companies. However, the data on all the select 1,215
companies including HDFC and other three outlier companies are separately presented.
The study also presents comparable data for the preceding two years 2006-07 and 200708 for the same set of companies, based on the analysis of their accounts for the
respective years.
Keywords: Non-banking, share trading, merchant banking, capital market, lease and hire
purchase, Housing Development Finance Corporation.
Introduction:
International Refereed Research Journal
www.researchersworld.com Vol. II, Issue 1,January 2011
ISSN 2229-4686
124
The activities of non-banking financial companies (NBFCs) in India have undergone qualitative
changes over the years through functional specialization. The role of NBFCs as effective financial
intermediaries has been well recognized as they have inherent ability to take quicker decisions,
assume greater risks, and customize their services and charges more according to the needs of the
clients. While these features, as compared to the banks, have contributed to the proliferation of
NBFCs, their flexible structures allow them to unbundle services provided by banks and market the
components on a competitive basis. The distinction between banks and non-banks has been gradually
getting blurred since both the segments of the financial system engage themselves in many similar
types of activities. At present, NBFCs in India have become prominent in a wide range of activities
like hire-purchase finance, equipment lease finance, loans, investments, etc. By employing innovative
marketing strategies and devising tailor-made products, NBFCs have also been able to build up a
clientele base among the depositors, mop up public savings and command large resources as reflected
in the growth of their deposits from public, shareholders, directors and other companies, and
borrowings by issue of non-convertible debentures, etc. Consequently, the share of non-bank deposits
in household sector savings in financial assets, increased from 3.1 per cent in 1980-81 to 10.6 per
cent in 1995- 96. In 1998, the definition of public deposits was for the first time contemplated as
distinct from regulated deposits and as such, the figures thereafter are not comparable with those
before.
Non-banking Financial Institutions carry out financing activities but their resources are not directly
obtained from the savers as debt. Instead, these Institutions mobilize the public savings for rendering
other financial services including investment. All such Institutions are financial intermediaries and
when they lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment
Institutions. Apart from these NBFIs, another part of Indian financial system consists of a large
number of privately owned, decentralized, and relatively small-sized financial intermediaries. Most
work in different, miniscule niches and make the market more broad-based and competitive. While
some of them restrict themselves to fund-based business, many others provide financial services of
various types. The entities of the former type are termed as "non-bank financial companies
(NBFCs)". The latter types are called "non-bank financial services companies (NBFCs)". Post 1996,
Reserve Bank of India has set in place additional regulatory and supervisory measure that demand
more financial discipline and transparency of decision making on the part of NBFCs. NBFCs
regulations are being reviewed by the RBI from time to time keeping in view the emerging situations.
Further, one can expect that some areas of co-operation between the Banks and NBFCs may emerge
in the coming era of E-commerce and Internet banking. The RBI regulates NBFCs engaged in
Equipment leasing, hire purchase finance, loan and investment, residuary non-banking Companies
(RNBCs) and the deposit taking Activity of miscellaneous non-banking Companies (chit funds). With
the amendment Of the RBI Act in 1997, it is obligatory for NBFCs to apply for a certificate of
registration (COR). As at the end of June, 2004, the RBI Received 38,050 applications for
registration. Out of these, the RBI approved 13,671 Applications, including 584 applications of
Companies authorized to accept public Deposits. The supervisory role of the RBI Encompasses onsite inspection, off-site Monitoring, market intelligence and exception Reports of statutory auditors.
Data and Methodology:
For the present study data are collected from various issues of RBI Bulletin regarding Financial and
Investment companies. This article analyses the performance of non-government financial and
investment companies (other than banking, insurance and chit-fund companies) during the year 200809. The study is based on the audited annual accounts of 1,215 companies, which closed their
accounts during the period April 2008 to March 2009. The segment of financial and investment
companies in the private corporate sector is highly skewed. The presence of a large sized company,
ISSN 2229-4686
125
viz., Housing Development Finance Corporation (HDFC) Limited in the study would exert
considerable influence on the overall performance of the companies in this group in terms of various
quantitative measures. In view of such marked skewness in the size structure, the analysis presented
in the article excludes results of HDFC. The study also presents comparable data for the preceding
two years 2006-07 and 2007-08 for the same set of companies, based on the analysis of their accounts
for the respective years.
I. Composition of the Select Companies:
The select 1,211 financial and investment companies were classified into five groups, viz., (1) Share
trading and investment holding, (2) Loan finance, (3) Asset finance, (4) Diversified and (5)
Miscellaneous. A company was placed in one of the first three principal activity groups if at least half
of its annual income during the study year 2008-09 was derived from that principal activity consistent
with the income-yielding assets. In case no single principal activity was predominant, the company
was classified under Diversified group. Companies not engaged in the above three activities,
however, conducting financial activities were classified as Miscellaneous3. The composition of the
select companies according to their total number, paid-up capital, main income and total net assets
across the above-mentioned activities are presented in Table 1.
The Share Trading and Investment Holding companies, which accounted for 41.9 per cent, in terms
of number, of the select 1,211 companies, had a share of 30.7 per cent of the total paid-up capital in
2008-09; but accounted for only 12.8 per cent of the total net assets and 14.0 per cent of the total
main income. Loan Finance companies (37.8 per cent in terms of number) accounted for 51.6 per
cent of total paid-up capital, contributed a major share in total main income and in total net assets at
70.6 per cent and 65.3 per cent, respectively, in 2008-09.
Activity
Share trading
Investment
holding
Loan finance
Table -1
Number of
Companies
507
-41.9
(Amount in ` crore)
Paid-up
Capital
7,567
-30.7
458
12,736
-37.8
-51.6
Asset finance
42
1,393
-3.5
-5.6
Diversified
49
410
-4
-1.7
Miscellaneous
155
2,568
-12.8
-10.4
All Activities
1,211
24,675
-100
-100
Note: Figures in parentheses represent percentages to total.
4,069
Total
Net Assets
41,171
-14
-12.8
20,544
-70.6
1,905
-6.5
672
-2.3
1,906
-6.6
29,097
-100
2,09,417
-65.3
13,806
-4.3
6,503
-2
50,038
-15.6
3,20,934
-100
Main Income
II. Operational Results:
ISSN 2229-4686
126
Onset of global financial crisis in 2008- 09 initially led to liquidity problems in non- banking
financial companies as their traditional funding sources dried up. However, the liquidity-augmenting
measures taken by the Reserve Bank addressed the problem swiftly. Subsequently, demand for credit
also came down. On another front, reversal of capital flows in the second half of the financial year
put severe pressure on domestic capital market and the investors suffered huge losses. Operating
results of non-banking financial and investment companies were also affected.
The main income of the select 1,211 non-government non-banking financial and investment
companies increased only by 15.7 per cent in 2008-09 to ` 29,097 crore as against 40.6 per cent
growth observed in 2007-08 (Statements 1 and 3). Growth in interest income (which contributed 49.2
per cent to the total income) at 30.8 per cent during the year under review was lower compared with
61.8 per cent recorded in the previous year and net profit from share dealings (contribution to total
income is 10.6 per cent) declined by 19.0 per cent. However, the other income (contribution to total
income is 25.2 per cent) grew by 34.4 per cent during 2008-09. As a result, total income of the select
companies increased by 20.8 per cent in 2008-09 as compared with 46.9 per cent in the previous year.
Interest payments went up by 40.0 per cent in 2008-09 on top of 62.7 per cent growth
registered in 2007-08. However, employees remuneration witnessed a growth of only 14.0 per cent
in 2008-09 as against 68.4 per cent in 2007-08. Growth in depreciation provision of 15.2 per cent
during 2008-09 was also lower compared with 28.1 per cent growth in 2007-08. As a result, total
expenditure went up by 33.4 per cent in 2008-09 as compared with 62.6 per cent growth registered in
2007-08.
Accordingly, operating profits and post- tax profits of the select companies declined by 6.7
per cent and 7.9 per cent, respectively, during the period under review (Table 2). Operating profit
margin, measured as a ratio of operating profits to main income, of the select companies decreased to
35.0 per cent in 2008-09 from 43.4 per cent in 2007-08 (Table 3). The return on shareholders equity
(ratio of profits after tax to net worth) of the select companies was lower at 7.8 per cent in 2008-09
compared with 9.5 per cent registered in 2007-08. However, the select companies rewarded their
shareholders with marginally higher dividends in 2008-09. The dividend rate increased marginally to
6.8 per cent in 2008-09 from 6.6 per cent in 2007-08. Retention ratio (retained profits to profits after
tax) of select companies decreased moderately to 80.3 per cent in 2008-09 from 82.8 per cent in
2007-08 (Statement 2). Bad debts including provisions accounted for a higher share of 5.3 per cent of
total income in 2008-09 as against 4.4 per cent in the previous year, indicating deterioration in assets
quality of the select companies.
While the companies across all the groups recorded lower profits, those engaged in miscellaneous
financial activities, could post positive growth in their operating profits and post-tax profits in 200809. Companies in Share Trading and Investment Holding activity and Diversified group were
most adversely affected in terms of growth in net profits. The companies engaged in miscellaneous
financial activities registered the highest operating profit margin followed by the companies dealing
in Share Trading and Investment Holding activity. The dividend rate was the highest for the
companies engaged in miscellaneous financial activities.
III. Sources and Uses of Funds Sources of Funds:
Faced with a recessionary prospect world-wide, business of non-banking financial and
investment companies expanded at a slower pace. The select companies raised funds amounting to `
44,947 crore during 2008-09 as against ` 86,348 crore raised during the previous year (Statement 5).
Funds raised through external sources declined to ` 30,251 crore from ` 74,250 crore in the previous
year.
Table-2: growth Rate of Select Items, 2007-08 and 2008-09
Activity
Item
All Activities
ISSN 2229-4686
127
Share Trading
Asset
& Investment
Loan Finance
Diversified Miscellaneous
Finance
Holding
2008- 2007- 2008- 2007- 2008- 2007- 2008- 2007- 20082007-08
09
08
09
08
09
08
09
08
09
200708
200809
Main
Income
40.6
15.7
-10.9
-3
63.6
28.3
41.2
27.3
27.5
-12.7
54.8
-28.6
Total
Income
46.9
20.8
-6.5
-6.3
61.5
28.4
48.9
23.4
31.9
6.8
71.2
21.1
Total
Expenditure
62.6
33.4
49.1
-4.2
67.8
43.9
43
31.2
32.2
17.9
65.9
25.3
Operating
Profits
24.9
-6.7
-25.9
-5.8
55.8
-9.3
84.8
-44.3
17.6
-33.3
95.8
5.4
Profits
After Tax
18.4
-7.9
-20.5
-14.8
39.4
-8.6
63
-4.3
42.1
-48.9
88.9
8.2
Table 3: Select Profitability Ratios, 2007-08 and 2008-2009
Activity
Item
Operating
Profit Margin
Effective Tax
Rate*
Return on
equity
Dividend
Rate
. Return on
Assets
All Activities
Share
Trading&
Investment
Holding
Loan Finance
Asset
Finance
Diversified
Miscellaneous
2007- 2008- 2007- 2008- 2007- 2008- 2007- 2008- 2007- 2008- 200708
09
08
09
08
09
08
09
08
09
08
200809
43.4
35
68.7
66.8
32.2
22.8
23.7
10.4
21.3
16.3
87.7
129.7
26.3
28.1
15.9
19.7
28.2
29.1
30.5
33.9
26.9
38.2
11.4
11.1
9.5
7.8
7.1
8.3
6.7
10
7.6
6.4
3.1
18.8
16.4
6.6
6.8
4.3
7.2
5.6
6.2
3.3
3.2
3.4
12
11.9
2.4
6.5
5.2
2.2
1.7
1.7
1.6
2.2
1.1
3.7
3.3
Calculated based on the companies which made profits during that year.
Accordingly, the share of external sources in total sources declined to 67.3 per cent during
2008-09 as against 86.0 per cent in the previous year (Table 4). The share of funds mobilised from
capital market through issue of fresh capital (including premium on shares) in the total sources of
funds decreased to 12.7 per cent during 2008-09 from 22.9 per cent during 2007-08. Similarly, share
ISSN 2229-4686
128
of borrowings declined to 52.0 per cent during 2008-09 from 56.8 per cent during 2007-08. The share
of Debentures in total borrowings remained close to 28 per cent, whereas, the share of Bank
borrowings in total borrowings decreased to 55.6 per cent during 2008-09 from 59.1 per cent in
2007-08.
IV. Liabilities and Assets Structure :
Liabilities Structure:
The total liabilit ies of t he select companies increased by 15.8 per cent to `
3,18,167 crore in 2008-09 (Statement 4). Though Borrowings (outstanding) grew at a lower rate by
13.8 per cent in 2008-09, it continued to be the major component, constituting 60.5 per cent of
total liabilities (Chart 1). The share of bank borrowings in total borrowings marginally increased to
44.7 per cent in 2008-09 from 43.2 per cent in the previous year. The debt-equity ratio marginally
increased to 106.2 per cent in 2008-09 from 105.6 per cent in 2007-08. Total outside liabilities
grew at a higher rate (17.0 per cent) compared with net worth (13.1 per cent). As a result, the ratio
of total outside liabilities to net worth increased to 226.9 per cent in 2008-09 from 219.4 per cent in
2007-08. The composition of total liabilities of select companies across activity groups is given in
Table 4.
Assets Structure:
T he asset s p at t er n o f t he select companies showed marginal variation in 2008-09
from that of previous year (Table 6). While the share of Loans and Advances extended by the
select companies in total assets decreased to 60.9 per cent in 2008-09 from 61.7 per cent in 2007-08,
the share of Investments in total assets increased to 22.9 per cent in 2008-09 from 22.0 per cent in
2007-08. Invest ment s and loans and advances extended by these companies grew at a lower
rate by 20.6 per cent and 14.3 per cent, respectively, in 2008-09 compared with 42.6 per cent and 45.2
per cent, respectively, in 2007-08. The ratio of borrowings to total assets decreased to 60.5 per cent in
2008-09 from 61.5 per cent in 2007-08.
Table 4: Liabilities Structure of Select Financial and Investment Companies, 2007-08 and
2008-09
Share
Trading
All Activities
Loan Finance
&Investment
Holding
20072008- 2007- 2008- 2007- 200808
09
08
09
08
09
Capital and
Liabilities
A. Share
Capital
B. Reserves
and Surplus
Asset
Finance
Diversified
Miscellaneous
2007- 2008- 2007- 2008- 200708

09
08
09
08
200809
8.2
7.8
19.3
18.4
6.5
6.1
7.3
10.1
6.7
6.4
5.6
5.1
23.1
22.8
52.5
54.6
19.6
19
9.9
10.4
28.1
28.2
14.1
15
C.Borrowings 61.5
60.5
22.4
19.6
68.7
66
68.4
70.6
44.7
43.3
67.8
69.9
i. Debentures
17.8
3.8
3.5
22
20
29.1
40.5
10.3
5.9
14
15.6
18.3
ii.Bank
borrowings
D. Liabilities
Sundry
Creditors
E. Other
Liabilities
Total
129
ISSN 2229-4686
26.6
27
5.8
6.3
28.1
28.1
28.2
16.2
24
25.7
39.2
42.4
5.7
5.3
4.7
6.3
3.7
3.7
13.4
18.5
20.6
11
8.3
1.9
1.6
2.2
1.2
4.8
3.5
2.6
2.4
4.4
3.4
1.5
3.6
1.1
1.2
1.6
5.2
0.9
1.4
1.5
1.6
100
100
100
100
100
100
100
100
100
100
100
100
Borrowings (outstanding) continued to be t he ma jor co mp o nent in t he t o t al

liabilities for all the groups of companies, except for the companies engaged in Share Trading
and Investment Holding activity, for which reserves and surplus was the major
component. Major contributor in total borro wings was debent ures in case of co mpanies
engaged in Asset Financeactivity, whereas, for other companies bank borrowings was the
major contributor.
The asset s st ruct ure of t he select co mpanies was in line wit h t he major activity
undertaken by them. Investments accounted for a major share of 58.0 per cent in total assets
for co mpanies in Share Trading and Investment Holding activity, whereas, loans and
advances extended fo r med a ma jo r shar e fo r co mp an ies eng aged in Lo an Finance
and Asset Finance activity at 70.4 per cent and 80.2 per cent, respectively, in 2008-09.
Table -5: Assets Structure of the Select Companies

Assets
All
Share
Loan Finance
Asset
Diversified
Miscellaneous
Activities
Trading
&Investment
Holding
130
ISSN 2229-4686
Finance
200
708
2008- 2007- 2008- 2007- 2008- 2007- 2008- 2007- 2008- 200709
08
09
08
09
08
09
08
09
08
200809
A. Cash and
Bank Balances
8.3
8.8
4.3
7.8
8.8
6.3
7.5
10.1
6.2
3.3
10
20.4
Deposits with
Banks
8.1
8.7
4.2
7.8
8.7
6.2
9.7
5.9
3.2
9.8
20.1
B. Investments
22
22.9
60.8
58
17.5
21.2
4.6
4.6
11.5
9.6
11.6
7.8
C. Receivables
65.2 64.5
20.9
20.5
71
70.4
82.9
80.2
77.8
81.3
75.1
68.7
61.7 60.9
17.2
16.2
69.4
68.8
81.6
74.1
75.6
73.1
62.1
58.8
2.4
2.6
3.4
0.4
0.3
0.3
0.5
1.1
1.1
11.5
8.4
2.4
2.4
11.7
11.5
1.1
1.1
0.3
0.4
2.4
3.7
0.2
0.4
1.6
2.3
9.7
11.4
0.3
0.3
0.2
3.4
0.1
0.3
1.4
1.2
1.5
0.8
0.8
4.2
3.8
2.1
2.8
2.3
0.7
100
0.2
100
0.8
100
1.3
100
0.9
100
0.2
100
0.6
100
0.9
100
0
100
0.2
100
0.3
100
0.6
100
(i) Loans and

Advances
(ii) Sundry
debtors
D. Inventories
Industrial
Securities
E. Net Fixed
Assets
F. Other Assets
Total
V. Conclusion:
It was observed from the consolidated results of the select 1,211 non-Government financial
and investment companies that growth in income, both main as well as other income, decelerated
during the year 2008-09. Though, growth in total expenditure also decelerated, it was higher than the
income growth. The growth in expenditure was mainly driven by the growth in interest payments. As
a result, operating profits of the select companies declined along with diminishing profitability during
2008-09. Business of select non-banking financial and investment companies expanded at a slower
pace during 2008-09. The share of external sources in total sources declined during 2008-09 when
compared with the previous year. However, they continued to be the major sources of finance. A
substantial portion of funds raised during the year was in the form of borrowings. Other significant
portion of funds was in the form of raising fresh capital from the capital market. Major portion of the
funds raised during the year was deployed as loans and advances in the credit market. However, its
share in total uses of funds decreased. The share of Investments in total uses of funds increased
during 2008-09 on account of investments in the mutual funds and shares and debentures of other
Indian companies.
References:
Nabhis Law relating to Non Banking Financial Companies, A Nabhi Publication, 1994, pp.
1, 3, 5.
ISSN 2229-4686
131
Reserve Bank of India Bulletin, August 2009, p. 591

Machiraju H.R.: Indian Financial System, Vikas Publishing House Pvt. Limited, 1998, p. 7.1
CMIE, Monthly Review of Indian Economy, Dec. 1997, pp. 129-131.
Reserve Bank of India Bulletin, July 1998, p. 581
CMIE, Monthly Review of Indian Economy, May 1999, pp. 119.
CMIE, Monthly Review of Indian Economy, June 1999, pp. 110.
Seema Saggar, Financial Performance of Leasing Companies, During the Quinquennium Ending
1989-90 Reserve Bank of India: Occasional Papers, Vol. 16, No. 3 September 95, pp. 223236.
Harihar T.S. Non-Banking Finance Companies, The Imminent Squeeze, Chartered Financial
Analyst, February 1998, p. 40-47.
Reserve Bank of India Bulletin, August 1997, pp. 592-593.
Reserve Bank of India Bulletin Various issues, February 1991, May 1992, December 1992
etc.
Economic Times, Ahmedabad Edition, 26/3/99, p. 10
Bhole, L.M., Financial Institutions and Markets, Tata MC Graw Hill Publishing CO. Ltd., 1992.
Report of the Working Group on Financial Companies, Reserve Bank of India, Bombay,
September, 1992.

Performance of Non-Banking Financial Companies in India - An Evaluation

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Performance of Non-Banking Financial Companies in India - An Evaluation

Загружено:

Авторское право:

Доступные форматы

- Journal of Arts Science & Commerce